Also known as: equitable conversion · equitable conversion doctrine
Written by attorneys · grounded in primary & secondary sources — see below
A doctrine under which equity regards the buyer as the owner of land and the seller as the owner of the purchase money once a binding contract for the sale of land is formed. The buyer therefore acquires an equitable interest that carries the risk of loss from casualty damage occurring before closing. The seller retains bare legal title as trustee for the buyer.
Peak Aero signed a binding contract to buy a hangar from Fair Aero for $4.2 million with closing scheduled sixty days later. Three weeks after signing a windstorm tore off large sections of the roof. Under the doctrine Fair Aero may still demand the full purchase price because Peak Aero became the equitable owner at contract formation and therefore bears the risk of loss.
Green Valley Cooperative entered a written contract to purchase Maria's farm for a fixed price with closing in sixty days. A tornado destroyed three barns before closing. Maria may obtain specific performance at the contract price because the doctrine treats Green Valley as equitable owner from the moment the contract was signed and therefore places the risk of loss on the buyer.
Select any source to read its text and confirm it supports the definition.
Brightline Development contracted to buy an apartment complex from Harborview Real Estate Trust. An electrical fire gutted one building before closing. Harborview may enforce the contract at the full price because the doctrine shifted the risk of loss to Brightline at contract formation and the seller holds legal title merely as trustee.
Grove Fiber signed a contract to purchase a hilltop parcel containing a cell tower from South Satellite. Lightning toppled the tower one week before closing. South Satellite may still demand the full purchase price because the doctrine gave Grove Fiber an equitable interest at contract formation and the seller holds title only as trustee during the executory period.
In jurisdictions following the majority rule the risk passes to the buyer at the moment a binding contract for the sale of land is formed. The buyer therefore must pay the full contract price even if the property is damaged or destroyed before closing. Some jurisdictions or statutes instead leave the risk on the seller until deed delivery or possession.
Supporting sources
The buyer acquires an equitable interest in the land that is treated as ownership for purposes of risk of loss, creditor rights, and the passage of benefits and burdens during the executory period. The seller retains only bare legal title as trustee for the buyer.
Supporting sources
Yes. When the contract contains no express allocation of casualty risk the doctrine supplies the default rule. In a majority-rule jurisdiction the buyer therefore bears the loss from accidental damage occurring after contract formation but before closing.
Supporting sources
No. Under the majority approach the buyer may not avoid the contract or reduce the price merely because improvements were destroyed. The buyer must close at the contract price and may pursue any available insurance proceeds.
Supporting sources
…right to redeem, the mortgagee must request a court to sell the property at public auction. See Lewis, Reeves, How the Doctrine of Equitable Conversion Affects Land Sale Contract Forfeitures, 3 Real Estate Law Journal 249, 253 (1974). See also KRS 426.005, 426.525. From the proceeds of the sale, the mortgagee recovers the amount owed him…